The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert to warn investors about potential scams associated with marijuana-related stocks. Medical marijuana is legal in almost 20 states, and recreational use of the drug was recently legalized in two states. As a result, the cannabis business has been getting a lot of attention—including the attention of scammers. Like many investment scams, pitches for marijuana stocks may arrive in a variety of ways—from faxes to email or text message invitations to webinars, infomercials, tweets or blog posts.
The con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success. The scammers behind these "pump and dump" scams can then sell off their shares, leaving investors with worthless stock.
"Investors considering investing in a heavily touted, thinly traded company should question why a total stranger would tell them about a really great investment opportunity. In reality, there is likely no true opportunity," said Gerri Walsh, FINRA's Senior Vice President for Investor Education.
One company was touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock "could double its price SOON." Yet the company's balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.
To avoid potential marijuana-related stock scams:
1. Consider the source. It's easy for companies or their promoters to make exaggerated claims about lucrative contracts, the company's revenue, profits or future stock price. Be skeptical about companies that issue a barrage of press releases and promotions in a short period of time. The objective may be to pump up the stock price. Likewise, be wary of information that only focuses on a stock's upside with no mention of risk.
2. Do your research. Search the names of key corporate officials and major stakeholders, as well as the company itself. Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags. For example, the CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history. The former CEO of a similar company was recently indicted for his role in a multi-million dollar mortgage-based Ponzi scheme. Check the Federal Bureau of Prisons Inmate Locator to determine if a solicitation is coming from someone who has served time in a federal prison. Many states also have similar prisoner locator systems.
3. Know where the stock trades. Most unsolicited spam recommendations involve stocks that do not trade on national securities exchanges. Instead, these stocks may be quoted on the over-the-counter (OTC) market where a company does not need to meet minimum standards to be included. Many OTC securities don't have a liquid market and can move up or down in price substantially from one trade to the next. This may make it difficult to sell your holdings.
4. Read a company's SEC filings, if available. Most public companies file reports with the Securities and Exchange Commission (SEC) made available in the SEC's EDGAR database. Read any reports you find and verify any information you have heard about the company. Remember that just because a company files reports with the SEC does not mean it will be a good investment—or the right fit for you. Also, be aware that not all financial information filed with the SEC, or published elsewhere, is independently audited. Unaudited financials are just that—not reviewed by an independent third party.
5. Be wary of frequent changes to a company's name or business focus. Name changes and the potential for manipulation often go hand in hand. One low-priced stock now claiming to be in the medical marijuana business has had four name changes in the past 10 years. Another company switched from the coffee business to focus "on the rapidly emerging medical marijuana industries." Name changes can turn up in company press releases, internet searches and, if the company files periodic reports, in the SEC's EDGAR database.
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